Investment Wholesaling And Segmenting The Four Types Of Financial Advisors

Investment Wholesaling And Segmenting The Four Types Of Financial Advisors

Historically, different financial advisors operated different business models depending on their industry channel – RIAs managed investment portfolios, while wirehouses sold proprietary products and securities from their inventory, and independent broker-dealers sold third-party investment products. Accordingly, asset managers and product manufacturers aligned their investment wholesalers to those channels, with one for wirehouses, another for independent broker-dealers, and a third for the independent RIA community. The challenge, though, is that as the advisor value proposition evolves, along with industry business models, and the regulatory environment, the “traditional” industry channels are breaking down as a way to segment financial advisors!

In this post it will discuss from the investment wholesaler perspective, the four different types of financial advisors that have emerged, how they differ based on client approach and value proposition, and how wholesalers can best add value to these different types of advisors!

The key issue is to recognize that financial advisors tend to have fundamentally different ways in which we frame our own value proposition, and approach client situations, that are no longer necessarily defined by industry channel. And this matters, because when companies with their own wholesalers are trying to reach advisors, the ways in which an advisor approaches their clients and define their own value proposition heavily impacts what that advisor will and will not see as valuable from their wholesalers!

For instance, some advisors taking a very financial planning-centric approach to clients, while others are more investment-centric. And when it comes to delivering value to clients, some are more advice-centric, and others are more product-centric. Thee various combinations result in four categories of financial advisors: (1) fee-for-service financial planners; (2) investment managers; (3) needs-based sellers; and, (4) asset gatherers.

From the perspective of the wholesaler, it is crucial to recognize that each of these segments receives different value from a wholesaler, and demands different types of products and services. Because if an advisor is an asset gatherer, they are going to want to see a product that can easily help them gather assets… but if they are needs-based sellers, they will want planning strategies and sales ideas… and if they are an investment manager, they will want products that they can manage to demonstrate their own expertise (without outsourcing to other active managers!)… and if an advisor is a fee-for-service financial planner, they will want solutions that help them simplify investment management to free up time to service clients and focus on planning. Thus, investment managers (which might be an RIA or a Rep-As-PM at a broker-dealer) tend to use stocks, bonds, and ETFs, but asset gatherers (which might be RIA or at a broker-dealer) are more likely to use multiple TAMPs and SMA, and fee-for-service financial planners (usually RIAs) will typically just use one TAMP for all of their assets and be uninterested in individual investment products at all!

The bottom line, though, is simply to recognize that the whole advisory industry is in the midst of reorienting itself, and trying to segment financial advisors by wirehouse, broker-dealer, and RIA industry channel no longer works. Advisors are reinventing their value propositions and where they focus, while DoL fiduciary further forces firms to re-draw their lines and tech innovation accelerates these trends. Which means, if wholesalers want to reach financial advisors and add value to them, wholesalers need to pay attention to the four different types of financial advisors!

Tor a lot of big national asset managers, there’s a set of wholesalers for RIAs, there’s another set of wholesalers for independent broker-dealers, there’s maybe another set of wholesalers just to call on the wirehouses, and maybe there’s a separate national account or key accounts team that focuses on wholesaling to firms that centralize their investment offerings. Because, if I’m a registered rep at broker-dealer but I use the home office to design portfolios, it doesn’t really make any sense for the wholesaler to spend time with me as the rep. You’ve got to send someone from national accounts wholesaling to the home office if you want to get onto that platform.

But beyond just the different industry channels, I think we also have fundamentally different ways that we as advisors are now framing our own value propositions in approaching client situations. And it matters because so many investment firms now, I find, with their wholesalers, they’re trying to reach us as advisors, whether it’s firms looking to serve advisors outsourcing investment manager responsibilities, other tech firms and platforms serving us, and especially financial services product manufacturers trying to distribute products through us to our clients, the ways we approach our clients and define our value proposition really impacts what we do and don’t see as valuable from wholesalers. But when the wholesalers don’t recognize that, we get all these awkward mismatches that just don’t line up anymore with traditional industry channels.

Financial Planning Oriented vs Investment Oriented & Product-Centric Vs Advice-Centric

I’ll give you an example of this. Some financial advisors have a client approach that is very investment oriented. They approach clients as, “I’m here to help you invest your money.” So, the advisor might manage it themselves or maybe they buy mutual funds or maybe they outsource it to someone else, but they focus on portfolios.

By contrast, other advisors are very financial planning oriented in the approach. They lead with financial planning. Every client starts with a financial plan. They might produce the plan themselves, they might delegate it, they may use a third party firm or home office to help create it, but they view the financial planning as the primary approach and focus, and only secondarily do they then plug in investment products because at some point, even if you’re giving advice, the money’s got to land somewhere.

Now, a second way to think about advisors, is what we get paid for. Some of us get paid for our products and some of us get paid for our advice itself. So, an advice-centric financial advisor views their primary product value proposition usually as themselves. They see it as, “It’s my knowledge. It’s my expertise. The client pays me for my personal value.” That’s an advice-centric value proposition.

Now, for other advisors, they’re more product-centric. The primary value that they bring to the table is the quality of the products they provide. So, the job is to implement a financial services product, and the better products I have as a product-centric advisor, the more things I could sell, and the more things I can implement with clients. But the value isn’t me per se, the value is my ability to bring valuable products to the table, for my clients.

Four Types Of Financial Advisor Value Propositions

Here’s why this segmentation matters. Bear with me a moment. Think about this as like a two-dimensional grid. So, on the left side we’ve got financial planning-centric advisors, on the right side we have investment-centric advisors. And then across the top we have the advice-centric advisors, and across the bottom we have the product-centric advisors. So, we now kind of got this two-by-two grid where people line up in different categories.

The upper left would be financial planning oriented advisors that are advice-centric. This is the domain of those who offer a primarily fee for service financial planning. They focus on financial planning advice, the value is the person who gives the advice. It’s the advisor. So, this would include advisors that charge hourly, project, and retainer financial planning fees. I think it even includes a subset of advisors that maybe charge for assets under management, but in the end, the portfolio is not meant to be the value. It’s usually a very simple portfolio. Because the client isn’t really paying for the portfolio, they’re paying for financial planning advice, and maybe it just might be easier to bill a portfolio if they have assets anyways.

So, when we look at financial planning-centric advisors, we have a different grouping than the rest. And the interesting phenomenon is that I find they often span channels. Now, planning fee for service advisors tend to be independent RIAs or at least dual-registered, because I can’t actually get paid a fee under a broker-dealer form and I’ve got to have an RIA or a hybrid registration.

But here’s why it matters from the perspective of investment wholesalers that come at us. When we’re financial planning-centric, we tend to outsource our investments. For instance, these are the RIAs that use TAMPs, because the advisor’s value proposition isn’t focused on the investments, it’s focused on the financial planning. They’re often quite comfortable to delegate the non-essential investment process to a TAMP. And many advisors that are planning centric, they just kind of pick one TAMP for everything. Pnce you find a reasonable solution to plug in after you do the real planning stuff for clients, why bother with more?

Now, the upper right corner is different. These are the investment oriented advisors that are still advisor-centric. So, these are typically the advisors that view their primary value proposition as their ability to implement quality investments for clients. Now, the key distinction here is the investment oriented advisor who is advice-centric doesn’t want to use products to implement. They don’t want to use actively managed funds, they don’t want to use separately managed accounts, they don’t want to use TAMPS. Their investment ideas, their strategies, their ability to pick the right investments, that’s their value as the advisor.

Again, this matters from the perspective of wholesalers who typically approach us, and particularly because this isn’t specific to a channel. There are RIAs who are investment oriented and advice-centric. They created the RIA to build portfolios for the clients, but there are also registered reps and broker-dealers who did the same thing. It’s even got a label now. It’s called Rep-as-PM, which is short for rep as portfolio manager, because as the name implies, it’s the rep who’s trying to create the value for clients by being the portfolio manager.

Which is important because if you’re a wholesaler and I’m an investment oriented advice-centric advisor and you come at me with actively managed funds, SMAs, and a TAMP, you’re wasting your time. Whether I’m an RIA or a Rep-as-PM or at a broker-dealer, I’m not investing with your solutions because I’m going to do it myself, because that’s my value.

And I think this is actually where ETFs are shining right now. For a lot of investment-oriented advisors, we don’t necessarily have time to do individual stock analysis. Though some may have a stock picking process or they grew large enough to hire an investment team to help, it’s certainly not all advisors.

For a lot of advisors that are in this investment oriented category, ETFs are just an easier building block to manage than individual stocks. And so, the investment oriented advisor often then ends up using ETFs. But here’s a key point to it. It’s not that the investment oriented advisor is buying ETFs because they’re going passive. They’re actively managing the ETFs.

But because the advisor says their value proposition is actively managing the ETFs, this is why even with all the growth of ETFs, I’m incredibly negative about actively managed ETFs. Because I think the investment product manufacturers have missed that the advisors who are using ETFs and managing them in their portfolios, it’s because the advisor wants to be the one adding value. I don’t want to hire some other active manager because then the client’s going to say, “What do I need you for? I could have bought the active fund directly.” The advisor says, “This is my value,” so they’re not going to adopt actively managed ETFs they’re not going to adopt actively managed mutual funds, they’re not going to adopt SMAs, and they’re not going to adopt TAMPs, because they build the portfolios themselves. But again, this isn’t specific to industry channels. This can be Rep-as-PM at a broker-dealer, or this can be a particular subset of independent RIAs that say investments are their value proposition.

The lower right corner is the third group. These are the investment oriented folks, because we’re still on the right, but product-centric because we’re across the bottom now of our little two-by-two grid. For these advisors, they may be focused on implementing investments, but their value isn’t meant to be hands-on management of the portfolio. It’s their ability to find good products, good third party managers, and bring those solutions to the table for their clients. This is where you see actively managed mutual funds, or maybe in the future, actively managed ETFs. This could be a series of separately managed accounts, this could be a TAMP, or several TAMPs.

And in fact, one of the key points of investment-oriented but product centric advisors is that they often use a pretty wide range of solutions. So, if the client wants a bond manager, they’ll get a bond manager. If the client wants a socially responsible investing approach, they’ll find a TAMP or an SMA to build it. If the client wants a certain portfolio, they’ll find a manager or bring it to the table. Because if they’re really trying to build a scalable business, they may eventually simplify that down to a couple of core providers, the go-to products that I know work, that I know I can sell my clients on, that they’re persuaded by.

But for the investment oriented product-centric advisor (and this is where most investment sales people really live), they function more like asset gatherers. Their goal is just to gather assets. I’ll gather assets into actively managed mutual funds, or SMAs, or TAMPs, whatever it takes. I’m just trying to gather assets, sell products, bring in dollars, and might use a wide range of solutions to do it.

But here again, asset gatherers exist across channels. There are RIAs that are very focused on asset gathering, they might use one or multiple TAMPs to collect assets. There are registered reps at broker-dealers that focus on asset gathering and might use a wide array of funds and SMAs and TAMPs in their platform. You know, whatever it takes to gather assets, they’ll find a product to fill the void.

But from the wholesaling perspective, this is a very different type of advisor. This is the advisor where you can give them products to check out and try to get a share of their wallet, or clients’ wallets, with that product. But you have to show them how to sell it, like what’s the pitch? How is it different and better than the products that they currently pitch? That doesn’t work for investment oriented firms that are advice-centric because the advisor says, “No, no, I’m the gatekeeper that picks the stuff. I don’t sell the stuff.” That’s the key difference between advice oriented advisors, where the value proposition is me, and product oriented advisors. With advice oriented advisors, they tend to be a gatekeeper. With product oriented advisors, they tend to be a sales distribution channel.

Now, the bottom left, the fourth of our little two-by-two grid is the financial planning oriented but product-centric advisor. This is the classic domain of needs based selling. Advisors who lead with a financial plan, find out what clients need, and then just implement whatever product they need at the end. But the key point is that they lead with financial planning and then get paid for product implementation. This is the domain of planning oriented brokers and planning oriented insurance agents as well. They’ll do financial planning for the clients because that’s how they determine what’s appropriate to sell at the implementation phase. They don’t lead with the products. They don’t say like, “Hey, I’ve got this cool fund that you should check out.” They lead with, “I’m going to do some financial planning for you, but ultimately, the value at the end is…” and then I’m going to implement some products to solve whatever problems come up.

Because these advisors are product-centric and get paid for products, they are in practice most likely to be at broker-dealers. Because, historically, that’s where needs based selling essentially emerged, broker-dealers and insurance companies. Do the financial plan, implement the client needs at the end. You know, financial planning is a highly effective way to determine clients’ needs and then sell them whatever they need. We’ve proven this over several decades now.

But from the wholesaling perspective, this approach is a little bit different. Investment-oriented advisors who are product centric want product ideas they can pitch and sell. Financial planning oriented advisors who are still product centric want planning strategies, sales ideas that fit planning strategies. If you see a client with this situation, here’s a cool product we have that fits this particular need. Because it’s not about selling the products, it’s about solving client needs with a product. It’s a different approach.

And, as a result, I actually find in practice that these are often the advisors that end up with the widest range of different investment products. Perhaps lots of actively managed funds that fit one client need and some SMAs that fit another client need. As a wholesaler, you can get a share of their wallet by only having a product that fits a specific planning strategy or need. Because, if they see a lot of clients with a lot of different needs, eventually you’ll get a share of that advisor’s wallet. But you have to lead with, “How does this fit a client’s planning need?” not, “What are the features of this product in particular?” It’s an important difference.

Investment Wholesaler Segmenting And The Four Types Of Financial Advisors

The Breakdown Of Financial Services Industry Wholesaling Channels [Time – 13:30]

We’ve got these four different types of advisors: the fee for service financial planners, investment managers, asset gatherers, and needs based sellers. Four different ways that advisors approach client situations and frame their own value proposition, four different perspectives on what kinds of investments are best to meet the needs of their business, and very different likelihoods to use different types of solutions. TAMPs are primarily the domain of the advice oriented financial planners on the upper left, and the asset gatherers on the lower right. Those investment oriented product centric folks or planning-centric advisors who just don’t even really want to do the investment stuff. They just recognize the client’s money, hustle it in somewhere.

SMAs may also get used by asset gatherers, but unique SMA strategies are particularly good for those in the needs based selling category in the lower left. By contrast, ETFs are primarily getting bought by investment managers in the upper right, as well as TAMPs themselves that are kind of being investment managers and then gathering assets under it. Because they view their value proposition as being the investment manager, so they don’t want to pay an active fund manager, TAMP, or an SMA. They want to get that advisory fee for managing the assets and then pick the appropriate building block. I think that’s where a lot of the adoption of ETFs in particular has been.

But again, I can’t emphasize enough that for any wholesalers out there, just looking at industry channels at this point is a terrible way to segment advisors. There are investment manager types in broker-dealers, there’s Rep-as-PM, and then RIAs. But not all RIAs want to be investment managers. Some just want to do financial planning and might outsource to a single TAMP. And then others are aggressive asset gatherers and then they might also still outsource to some TAMPs and SMAs. But if you come with a better product, you might get a slice of their business. If it’s a planning-oriented advisor, you’re either going to win all their business or you’re probably going to win none of it because they tend not to split because they just want to find a straightforward investment solution so they can get back to focusing on the financial planning.

The other key point of this is to recognize that however the advisor is focused, that’s also how the advisor wants to be approached. But if I’m an investment manager who picks investments for my clients, you have to approach me as a gatekeeper that picks investments. You know, show me your one best product that might make the cut in my portfolio and maybe I’ll decide it’s worthy. Although, in all likelihood, I’ll probably just tell you, “Go away and stop bothering me. If your product comes up in my analysis, I will call you.”

But if I’m an asset gatherer and you can give me a product that I can easily gather assets into, ideally one that this is so great it sells itself, I might be very, very interested. Now, on the other hand, if I’m focused on needs-based selling, don’t come at me with products. Come at me with planning strategies and sales ideas which your product happens to fit into. And if I’m focused on fee for service planning, again, just don’t even bother trying to get a slice of my assets. Either be my trusted partner that I can outsource to entirely, or just don’t waste your time and mine.

But the bottom line is just to recognize that the whole advisory industry is in the midst of reorienting itself, of redrawing its dividing lines, where we’re reinventing our value propositions and we’re refocusing. And frankly, I think DoL Fiduciary is just accelerating some of this change, as is the tech innovation overall. And just think about it for a moment. There are advisors at large independent RIAs, Merrill Lynch, Vanguard, Schwab Private Client, who all operate as fiduciaries, use centralized investment management propositions, and lead with financial planning. Whoever thought that an independent RIA, Merrill Lynch, Vanguard, and Schwab would be a shared distribution channel in the industry, in the same category, or that RIAs and subset of asset gatherers at broker-dealers would fuel the growth of managed ETF portfolios? All of these dividing lines in the industry are getting redrawn across the channels to the point that channels don’t work anymore. You have to carve it up differently.

I hope that’s some helpful food for thought, and perhaps for some of you a new or different way to think about how to divide and segment the financial advisor landscape. This is Office Hours with Michael Kitces. Normally 1 p.m. east coast time on Tuesdays, but because I was onsite consulting with a large investment manager that’s trying to understand our space yesterday, I had to record today instead. Thanks for hanging out. I appreciate you joining us, and have a great day, everyone!

So what do you think? Do financial advisors vary based on client approach and value proposition? Do you wish wholesalers would better segment the market to provide value to you? 

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